Sunday, October 17, 2010

Itz Weekend Market Review

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Well, the normally bearish September/October period for stocks has not been the norm so far this year. Guess the old adage don't fight the Fed holds true. As David Tepper pointed out on a recent CNBC visit, if the economy recovers..stocks go up...if the Fed does QE2...everything goes up. Looks as if the latter is in motion.Bottom line COM or the cost of money. If the Fed decides to launch a major quantitative easing program to drive down rates and stimulate the economy then the dollar suffers. Dollar denominated assets like metals, oil, commodities, real estate and even stocks are forced to rise in dollar cost in order to maintain parity with their prior real valuations. As Itz pointed out the other day, it expects crude oil to track the silver move in the New Year & make an aggressive move higher. However, Itz sees the next few months in a sideways churning process, with oil trading in a $78/$84 range...followed by a breakout in January, upside oil target $110. For now Itz has exited the Proshares Ultra crude OIl ETF (UCO) & taken a 1/2 position in the Ultra Short (SCO) with an $11 stop.
Bernanke alluded to another QE program in his speech on Friday. As long as the Fed is applying pressure to rates and the dollar the market will continue higher. Eventually it will end badly. Probably very badly but that could be weeks, months or even a year down the road. Don't fight the Fed.
The Fed Beige Book is the latest update of economic conditions in the various Fed districts this week. Most likely it will show very little improvement, otherwise they would not be talking up QE2 in every appearance.

The second report is the Philly Fed Manufacturing Survey. This is viewed as a proxy for the national ISM at month end. The Philly Fed will give analysts a last chance to alter estimates before the end of October. Expectations are for a minor improvement in the Richmond district.
The financials took a hit this past week, Itz portfolio has JPM & C which looked as if they were ready to finally move and lead the S&P higher. On Friday S&P cut Bank America to a hold from a strong buy due to ongoing foreclosure woes. The problems stem from the major banks using robo-signers to sign tens of thousands of foreclosure documents without adequately researching each loan. Attorneys general from all 50 states launched a joint investigation into allegations that mortgage companies mishandled documents in foreclosing hundreds of thousands of homes. Dick Bove, with Rochdale Securities, said the banks could lose up to $80 billion from the various suits and forced buybacks. The investors who bought the original loans may have a way to force the banks to buy back all the mortgage securities at face value if they can prove there was fraud at any point in the process. Expect the major banks to slow or even halt making new loans until they decide what the impact of the foreclosure problem will be to their balance sheets. That will slowdown the home market even more than the foreclosure halt. The housing sector makes up a fifth of the economy and this mess could be a material impact that pushes us back into a recession. For that reason the administration should be proactive in making sure the investigation and resolution is done quickly and with a minor amount of pain to the system. Itz actually views the pullback as an opportunity to buy or add to the financial sector.
The U.S. Dollar came very close this week to hitting the ITZ target of 76, but the more important currency ITZ is focusing on is the commodity based Canadian dollar $CDW, which hit parity to the U.S. dollar.
Gold prices declined slightly after hitting an intraday high of $1388 on Thursday. Goldman Sachs raised its twelve-month target price to $1,650. Goldman said gold could rise another 28% by the end of 2012, also Silver +30%, Copper +28% and Cotton +54%. Several key reports came out pointing to rising oil demand around the world -but the U.S. is still mired in the quicksand of high unemployment. The various factors supporting prices last week including the dollar, hurricane, OPEC, closing of the Houston ship channel etc, have all faded from view and the current November contract expires next Wednesday the 20th.

On the earnings front, this week will be seeing the heaviest of reporting and by the end of the week we'll have a good idea of how this quarter will shape up to be. Technology seems to be the favored sector as the Nasdaq100 finally broke out, perhaps money is coming out of the banks and into tech? The S&P500 is finding some minor resistance at the 1175 (May highs) but Itz still believes that the Inverse H&S pattern completion should play out & hit the 1,225 level. Most analysts believe the market will finish the year higher,  Abby Joseph Cohen is expecting 1275-1300 on the S&P. On Friday though another well-known and very accurate market analyst, Doug Kass of Seabreeze Partners a fellow Tweeter posted the following on Twitter...
'I now believe there is at least a 50/50 chance that the year's high in the S&P Index has been put in now $$ 9:43 AM Oct 15


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